The Chennai bench of CESTAT in case of Sify Technologies Ltd. held that merely because assessee has not reverse credit attributable to provision of exempted services would not disentitle it to claim credit which is otherwise available in respect of input services used in provision of taxable services.

Facts of the case:

The assessee was engaged in providing taxable as well as exempted services. During the course of audit revenue observed that service department (receiving input services) has distributed the credit to the department providing exempted services. But revenue disallowed the entire credit distributed by the service department including that part as attributable to provision of taxable services. As a result a demand of credit reversal of Rs. 1,11,07,075/- along with equivalent penalty.

Assessee is in appeal before such disallowance of credit before CESTAT Chennai.

Contention of the Assessee:

Assessee submitted that when the records clearly demarcated the extent of credit allocable to departments providing taxable services and department providing exempted services, the revenue should have verified before questioning.

Further, the credit allocated to department providing exempted services Rs. 6,66,423/- was reversed by assessee on its own. Thus, action of revenue to disallow entire credit was grossly erroneous in law.

Held by CESTAT Chennai:

Tribunal observed that the order passed by the department is unreasonable because just because credit of Rs. .6,66,423/- allocated to the department providing exempted service, disallowance of entire credit of Rs.1,11,07,075/- allocated to Departments in Table-A providing taxable service is contrary to the principal of proportionality. Therefore, entire disallowance does not call for any decision in favour of Revenue.

It is because neither in Rule 6(2) nor in Rule 6(3) there is provision that erroneous allocation of credit to department providing taxable services would result in disallowance of entire Cenvat credit. Therefore, such an error which was accepted by assessee who already reversed such ineligible credit would not cost it to reverse otherwise eligible credit.

In result the case was remanded back for limited purpose of afresh credit eligibility calculation and penalty was deleted.